Synopsis
India, with a GDP growth exceeding 8% in 2023-24, is the fastest-growing major economy. Despite being recommended by Morgan Stanley and other investment houses for investors in emerging markets, foreign investment in Indian stock markets remains low.
India is the fastest-growing major economy in the world, a locomotive of the global economy pulling along other countries, including rich ones. Its GDP growth has averaged more than 8% in the first three quarters of 2023-24. Morgan Stanley and other investment houses have declared that India is one of the best places for investors in emerging markets. So, billions of dollars should be flowing into our stock markets, right?
Well, it’s not happening. If we take 2022, 2023 and 2024 to date, the net inflow has been very low, close to zero. An outflow in 2022 was followed by an inflow in 2023. But 2024 has seen a net outflow, largely on account of an exodus of $3.5 bn in May (partly caused by rumours of poor BJP performance in the general election). The markets are volatile, with some months seeing big inflows and others big outflows. But, on balance, astonishingly little has come in even as India’s stature has improve ..
Why? Paradoxically, the main reason has been India’s resilience in the face of Covid, the Ukraine war and El Nino. These three factors have laid low many developing countries. India’s three neighbours – Pakistan, Bangladesh and Sri Lanka – have all gone to the IMF for rescues. But India is solid as a rock.
The Russian market has crashed. China has been hit by overcapacity, a real estate bubble and Western sanctions. (Joe Biden has just raised import duty on Chinese EVs to 100%.) These have tarnished China’s future prospects, even if their initial impact is limited. Stock markets in Hong Kong and Shanghai have plummeted in the last year, even as India’s have broken records.
Historically, Indian markets have been very sensitive to foreign inflows and outflows. Once, FIIs were said to own half the entire floating shares in the market. When they exited in the Asian financial crisis of 1997-99, Indian markets were pulverised. The same happened after the dotcom bust and 9/11 terrorist attacks in the US. The only reason FIIs didn’t exit en masse was that there were no Indian buyers.
The trend has now reversed completely. Indian stock markets are being driven by massive domestic inflows, not foreign inflows. This was most vividly demonstrated during Covid, when FIIs exited en masse but domestic investors came to the rescue. The Indian middle class has fallen in love with systematic investment plans (SIPs), in which they have a certain fixed sum deducted from their salary every month and invested in a mutual fund.
Amateurs generally perform badly in stock markets. They tend to panic and sell when markets crash, and buy when markets are bloated and about to burst. Experts have long counselled them not to try to time the market. The best way is to systematically invest a fixed sum or proportion of salary every month – this applies to the self-employed as well as the salariat – into an MF and leave the choice of portfolio to a professional fund manager. This strategy has proved very successful in the last de ..
Currently, India has nearly 90 mn SIP accounts, an amazingly high number in a country with 300 mn households. In addition, markets are getting steady flows from insurance companies. Indian insurance is growing from a very low base and has huge expansion potential. The National Pension System invests 50-75% of its inflow into equities. All these factors keep domestic inflows steady even in stormy conditions.
You might think these are excellent reasons for FIIs to cascade into India. But they are bemused that domestic investors have pushed Indian stock markets so high as to look extremely expensive compared with other emerging stock markets.
One of the biggest MF managers told me three months ago that Indian markets were eight times more expensive than Russia’s, three times more expensive than China’s, and 2-2.5 times more expensive than Brazil’s or South Africa’s. I’m not sure what criteria he was using for these comparisons, but one thing is clear – India is king of the BRICS in stock market valuations right now.
But precisely because Indian markets are so expensive, FIIs think it wiser to pull out of India and diversify into cheaper emerging markets. This has given China a much-needed boost recently.
Twenty years ago, Indian markets crashed when FIIs exited. This meant FIIs could not exit beyond a point without paying a heavy penalty. But, today, market resilience provided by domestic investors means FIIs can exit without paying a steep penalty, and many are doing so. Foreign shareholding in HDFC Bank and ICICI Bank was once close to the RBI limit of 74%. But it’s down today to 47% and 44% respectively.
It is good for Indian investors to control stock markets rather than foreigners. It’s good in the long run for foreign investors too, although they find the market expensive in the short run. India has become a relatively safe haven among emerging markets in stormy times. And that is a feat.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This article was originally published by The Economic Times on May 21, 2024.
